USD a place of refuge

It looks as though the USD has found its mojo again and this once again is having clear ramifications for other asset classes.

Source: Bloomberg

US data showed some signs of life yesterday and perhaps the best way to look at this is through the Citigroup economic surprise index (this measures the data print relative to consensus), which jumped 8.5% yesterday. The end result, however, was a flattening of the yield curve, with solid buying in the long end of the curve (the 10-year treasury fell seven basis points). This is hardly thematic of a market that has priced in a greater probability of the Federal Reserve raising the target range this year.

Fed funds futures have actually seen the implied yield fall which makes the notion of earlier Fed action all the more bizarre. Still, FX traders have taken heart at moves lower in other developed bond markets and the USD has been the place of refuge. For me, this USD strength has been the key driver of the negative price action in the S&P 500, which is now eyeing a break of 2,100 and the 100-day moving average at 2,078. It feels as though the market could gravitate lower and I would not be surprised if the buyers simply stand aside and wait to see how the land lies.

Volatility seems to have been the big winner though with the VIX index putting on 15%, although it remains someway under the seven-year average of 18.08%. Implied FX and bond volatility have also risen and I feel that rather than liquidate a number of long positions, it has made sense to simply buy put options to hedge, given put option protection is historically cheap. It will be worth watching this index again today to get a sense of developing sentiment and whether the idea of a deeper pullback has legs.

Apple is also worth keeping an eye on, given its role as a structural leader within the broader market and price action yesterday was very bearish, although it did finish off its low.

With the USD a central focal point, we have seen modest buying in the currency today. EUR/USD has pushed through the key 61.8% retracement of the 8.4% rally seen between April to May at $1.0883, suggesting the move lower can push on. The buyers seem to be holding the pair above yesterday’s low however, but the momentum is clearly there and the path of least resistance is lower over this week. The same concept is seen in AUD/USD where I feel rallies are also good selling opportunities. Personally, I would be looking for a move into the 5 May lows of $0.7780 to re-apply shorts with a stop above yesterday’s high of $0.7840. Both trend and momentum oscillators suggest the pair is headed for the March and April lows.

Locally, we have seen poor Australian Q1 construction work data (-2.4%) which could negatively affect the upcoming GDP print on 3 June, with economists expecting a 40 basis point decline to 2.1% in the growth rate from Q4. Tomorrow’s private capital expenditure data will be key though with the market expecting the first estimate to be revised slightly higher. Expect this print to be closely watched by the Reserve Bank, so the FX market will be paying close attention to this.

Elsewhere, it’s really only Australian equities that felt the flow on from a poor overnight session, with front month oil, gold and copper seeing a modest reprieve from the selling. China has seen mixed trade, with the high growth, high P/E names faring worse on the day, although buyers seem to coming back into the market. The larger market cap stocks seem to be waiting for the next bout of news flow and this is a market that is consistently being feed new catalysts either from the CSRC (the regulator), the PBoC or government. For the Chinese market to really pullback, I think traders should watch the small cap index (specifically the Chi-Next index) as this is likely to be the canary in the coal mine, and it seems logical that pullbacks will occur during a period of limited news. Still, this is a market under-owned by international money managers and if they are ‘forced’ to increase exposure to China over the coming months, then it will be the most reluctant round of equity buying (albeit benchmarking) ever!

The ASX 200 was looking quite constructive yesterday having closed above the 15 May high of 5747, but today we’ve seen the index fall to build on yesterday’s momentum and the market has fallen 0.7%. The bulls would have hoped to see buying coming into the market after the unwind, especially as we have seen Aussie bond yields falling quite aggressively across all parts of the curve which re-enforces the income trade in equities. I think the technical set-up on the SPI futures (June contract) are worth looking at and today we have seen the short-term uptrend on the hourly chart break down. A break through 5707 (the 38.2% retracement of the recent rally) would be bearish and suggest a deeper sell-off in the cash market is on the cards.

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CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen.